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By XE Market Analysis July 29, 2020 4:25 am
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    XE Market Analysis: Europe - Jul 29, 2020

    The dollar is amid a second of trading steadily, consolidating the sharp declines seen over the prior 10 days. The narrow trade-weighted USD index has posted a 93.60-80 range so far today, holding within yesterday's range and above the 25-month low that was seen on Monday at 93.68. EUR-USD is showing modest gains, though has also remained with its Tuesday range and below the 22-month high see yesterday at 1.1782. Cable has settled in the lower 1.2300s, below the near five-month high seen Tuesday at 1.2953. AUD-USD whittled out a fresh high at 0.7179, but remained just off from the 15-month peak seen last week at 0.7183. USD-CAD settled near the 1.3450 mark, above Tuesday's seven-week low at 1.3329. USD-JPY remained heavy, but so far managing to hold just above yesterday's near five-month low at 104.93. The Japanese currency is registering as the biggest gainer on the week so far, gaining most against the dollar and New Zealand dollar, with just over a 2% advance versus both underperformers. The sputtering price action in global equity markets has driven safe haven demand into the yen, with the dollar evidently perceived to be no longer providing protection. Profit taking and position trimming has been a theme across markets over the last day into the Fed's policy announcement and the final week of political wrangling over the next U.S. fiscal package (there is some uncertainty about outcomes of both, or at least in terms of signalling with regard to the Fed). Corporate earnings and concerns about the impact of new localized lockdown measures due to spikes in coronavirus infections, alongside geopolitical tensions, have also been in the mix. Regarding the Fed, no policy changes are expected, though forex markets will be laser focused on whether there is a signal that it will tolerate higher inflation, as this could weigh on real yields, and thereby the dollar, further.

    [EUR, USD]
    EUR-USD is showing modest gains on the day, though has also remained within its Tuesday range and below the 22-month high see yesterday at 1.1782. The dollar is amid a second day of trading steadily, consolidating the sharp declines seen over the prior 10 days. Profit taking and position trimming have been a theme across markets over the last day into the Fed's policy announcement and the final week of political wrangling over the next U.S. fiscal package (there is a degree of uncertainty about the outcomes of both, or at least in terms of signalling with regard to the Fed). Corporate earnings and concerns about the impact of new localized lockdown measures due to spikes in coronavirus infections, alongside geopolitical tensions, have also been in the mix. Regarding the Fed, no policy changes are expected, though forex markets will be laser focused on whether there is a signal that it will tolerate higher inflation, as this could weigh on real yields, and thereby the dollar, further. The U.S. 10-year TIPS (inflation-protected security) hit a record low at -0.92% last week. As for the euro, the common currency had perhaps been due a correction after rallying strongly in the advent of the EU's 750 bln euro recovery fund. We see upside risk with regard to the dollar, which could sustain the correction in EUR-USD. We don't expect any changes from the Fed to the policy stance, QE, or forward guidance as we believe the framework review, expected last month, has been put off until the Fall, at least. We do still expect a very cautious stance from Chairman Powell given the retrenchment in reopening, spike in jobless claims, uncertainty over the new fiscal package and rise in geopolitical tensions, but there is a risk that markets will be left slightly underwhelmed. One positive for the U.S. is that the rate of new coronavirus cases appears to be stabilizing, falling by 2% last week, which fits the Gompertz curve of respiratory virus outbreaks (which has been studiously ignored by most media).

    [USD, JPY]
    USD-JPY remained heavy, but so far managing to hold just above yesterday's near five-month low at 104.93. The Japanese currency is registering as the biggest gainer on the week so far, gaining most against the dollar and New Zealand dollar, with just over a 2% advance versus both underperformers. The sputtering price action in global equity markets has driven safe haven demand into the yen, with the dollar evidently perceived to be no longer providing protection. Profit taking and position trimming has been a theme across markets over the last day into the Fed's policy announcement and the final week of political wrangling over the next U.S. fiscal package (there is a degree of uncertainty about outcomes of both, or at least in terms of signalling with regard to the Fed). Corporate earnings and concerns about the impact of new localized lockdown measures due to spikes in coronavirus infections have also been in the mix. The yen is likely to remain apt to directional change on the back of shifting risk premia in global markets. While the BoJ remains committed to uber stimulus, the central bank is no longer unique in this regard (a reflection of this was the 2-year UK yield recently dipping below Japan's 2-year yield for the first time ever), and so has been having little weakening impact on the Japanese currency relative to peers. Backed by a surplus economy, and one where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, the yen has built up a reputation as a reliable haven currency.

    [GBP, USD]
    Cable has settled in the lower 1.2300s, below the near five-month high seen Tuesday at 1.2953. The pounded lifted against most currencies yesterday, inspired by an FT article asserting that the EU is willing to drop its demand that the UK accepts EU state-aid rules and oversight of the ECJ (European Court of Justice), and that "while further work is needed, a middle ground is clearly emerging". This followed a Reuters report earlier in the week that EU trade negotiator Barnier believes UK PM Johnson wants a deal, according to unnamed sources who attended a closed-door briefing he gave to national envoys of the EU 27. This is despite the UK government's often repeated assertion that it's willing to take the UK out of the single market at year-end without a new trade deal, if it doesn't get what it wants. The Reuters sources cited also said that the Irish and Dutch representatives were also upbeat about the chances of a deal being made (Ireland and the Netherlands being the two EU nations proportionately most exposed to UK trade). The final round of EU-UK trade talks before the summer break are taking place in London this week. The deadline for reaching a deal before the UK leaves the single market at year-end is October, and things aren't likely to get interesting until then. The pound still remains the weakest of the main currencies on the year-to-date, so there is scope for sustained gains if markets perceive the odds for a deal are improving. Uncertainties still remain, however, particularly how broad any deal would be.

    [USD, CHF]
    The Swiss franc has steadied at firmer levels after dropping quite sharply against the euro on Monday, which reflected broad outperformance of the common currency and, possibly, the added influence of the SNB's intervening hand. Weekly sight deposit figures out of Switzerland have been suggesting that the central bank has been continuing to sell francs regularly, as it has been since the consequences of the pandemic took a grip on markets, which had the impact of increasing demand for the Swiss currency. A rise in sight deposits (money held by commercial banks) can suggest francs turning up after being sold by the central bank. EUR-CHF made a rare appearance on the 'biggest daily mover' list out of the main dollar pairings and associated cross rates on Monday, rising by over 1% at intraday highs. A seven-week high was pegged at 1.0841. The seven-month peak, seen in early June, is at 1.0921. The advent of the EU's recovery fund, seen as a milestone by many analysts (a new liquid AAA fund that also reduces Eurozone breakup risks) has by many accounts caused a re-weighting of the common currency in portfolios.

    [USD, CAD]
    USD-CAD has settled near the 1.3450 mark, above Tuesday's seven-week low at 1.3329. Oil prices continued to ply a narrow range, consolidating off recent four-and-a-half-month highs, lacking directional impulse presently. The Canadian dollar will likely remain hostage to fluctuations to the U.S. dollar and oil prices. Downside risks for the Canadian dollar include the OPEC+ group's course to easing output quotas, which could weigh on oil prices, alongside the coronavirus pandemic and geopolitical tensions.

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